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If there is ever a time to start understanding how interest rates work, now might be it! The Bank of Canada has been slashing interest rates consistently since the beginning of the Covid-19 pandemic. Below is a simple explainer of what it means to cut rates and how it could affect you and your money.

What You Need to Know

What Is an Interest Rate?

Simply put, an interest rate is the cost you pay to borrow money. For example, a bank may agree to lend you $10,000 but only if you agree to pay them 9% interest on that $10,000. This is how lenders get paid.

What Is the Federal Fund Rate? And Why Does it Change?

The federal fund rate, also known as the overnight rate, target rate, or nominal rate is one of the most important tools the federal government has.  A central banks ability to change the target rate is used to sway the economy in two major ways:

1. The first is inflation. The government can raise interest rates when inflation is becoming too high as a way to stabilize it. The idea is that the raised rates lessen the flow of credit into the financial system. These raised rates tend to discourage people from borrowing and spending, which in turn can stop the rise of inflation.
2. The second is to stimulate the economy. This is when growth is too low and unemployment is too high. By lowering the rates, the central banks hope to encourage borrowing and start a flow of money into the economy.

How Will Changes Affect You and Your Money?

Rate changes will affect anyone who has any debt. That means mortgages, lines of credit, credit cards…essentially anything you pay interest on! This is important for mortgages; especially when rates go down. If you have a fixed rate mortgage, rates going down may be a good reason to refinance and take advantage of lower interest rate.

What Do Interest Rates Have to Do with Investing?

Lowered rates are meant to encourage people to start investing in risky assets such as stocks and bonds.  This of course is part of the plan to stimulate the economy. By lowering interest rates, securities become more attractive than keeping your money in cash. The fact that the government takes steps such as this in an economic downturn is one of the reasons that securities typically will outperform cash in the long term.

The Bottom Line

The central banks have been using interest rate cuts to try to hedge against the economic impact of the covid-19 pandemic.  Lowered interest rates are designed to provide opportunity to businesses and investors. Be sure to talk to your advisor to find out how you could benefit.

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The concept of investment is no longer alien and almost everyone now has one form of investment or the other tucked away somewhere. Even new babies now have investments. Just as there is no age limit to investing so is there no limit to the extent of time you can hold your investment. You can hold your investments for decades and reap multiple profits on them. It is not all about having a long-term investment portfolio; there is a science to it also. It is important to be strategic in your choice of investment portfolios. Everyone has a risk appetite, and it is important to choose an investment portfolio that conforms with your risk principles. Another key factor to having a healthy long-term investment portfolio is adapting your investment approach to the changing dynamics of the financial market.

Secrets To Creating a Long-term Investment Portfolio 

When it comes to having an investment portfolio, it is important that you make the right decisions. This is what will ensure a healthy investment portfolio. If you are looking to grow your wealth over a 20-to-25-year span, you should try the following tips:

1. Select The Appropriate Asset Allocation: At this stage, you use your current financial situation to determine how you want to spread out your investment portfolio. To successfully do this, you must consider your age, the amount of capital you want to invest, and your risk appetite. Your risk appetite is important because when it comes to investment, you will make losses at one point or the other. So, depending on your risk appetite, you should choose an investment portfolio that is in line with your risk appetite. You should also consider your current expenses as you do not want to invest all your money and be left with nothing to settle your bills.
2. Structuring Your Portfolio: After determining how you want to allocate your investment portfolios, the next thing to do is to determine how much goes into each portfolio. This is where you determine how much goes into bonds, stocks, and cryptocurrencies. You can also go further by further dividing your portfolio allocations. For example, if you have an equity portfolio, you may decide to spread it across different industries to minimize your risks. You can also spread your bond portfolio into short-term bonds and long-term bonds.
3. Monitoring and Reviewing: After successfully structuring your investment portfolios, you need to keep an eye on them to make necessary adjustments where necessary. The fact that they are long-term investments does not mean you can abandon them and check them when you are ready to cash out. You analyze your positions from time to time and rebalance them where necessary. This is made necessary because of the constant price movements in the financial market which will make your initial trading positions change. Your current financial needs may also require you to change your position. If you have extra cash to invest, you may want to pump in more money and if you need cash, you may want to deduct from profits already accrued.
4. Strategic Rebalancing: After reviewing your portfolio and there is a need to rebalance your positions to make your portfolios healthy, you need to go about it in a strategic way.  In other words, while you identify a performing portfolio, you should also determine the portfolio you can use the proceeds of the performing security to buy. These are strategic decisions that must be taken carefully to ensure an all-round healthy investment portfolio over a long period.

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